Should You Rotate Audit Firms?
The practice of having a routine audit or review of the financial records of a non-profit organization is invaluable. Especially in this day when fraud is so prevalent. Being committed to this process provides assurances to both the board of directors of the organization as well as donors. The audit/review process allows for continued development of best practices by agency staff under the watchful eye of a CPA. Highly successful organizations are those that know how to leverage these practices in their business operation.
There has been some conversation about audit firm rotation within the nonprofit community. Some organizations have adopted this philosophy thinking that rotation between firms provides same sort of fresh prospective that rotating board members in and out of board positions does. I would like to suggest otherwise.
In my experience, the advantages to be had in the audit process for the organization begins with the relationship that is built with the audit firm. This relationship doesn’t develop overnight but is a process that spans time as the firm is continuously engaged for the audit/review. In a great relationship the CPA gets to know the vision and mission of the organization as well as its strengths and weakness. That way he or she can provide advice within the contexts of the specific nuances of the agency. This is lost when the audit firm is routinely rotated. Here is what AICPA has to say:
“Loss of “institutional knowledge”. Over successive audits, audit firms increase institutional knowledge, including, for example, their knowledge of the client’s accounting and internal control systems. This benefit is greatly diminished by rotation.”
The audit experience and outcome which goes well beyond the audit report itself never fully gets its feet on the ground if the organization is routinely working with a new firm.
The organization may well be paying more for the audit/review than necessary. When an audit firm first engages with a client they experience some “start-up costs” that invariably gets passed along to the client. It’s not hard to see where a long-term relationship would eliminate this and drive efficiency. Even re-engaging a firm after a hiatus of any length requires some catch up. Start up costs can’t be avoided even when returning to a prior audit firm.
AICPA even suggests that rotation results in increased audit failure. What is audit failure? It is when an audit does not find things which it should, meaning that there could be fraud.
“Studies by the Public Oversight Board, Commission on Auditor’s Responsibilities, and the National Commission on Fraudulent Financial Reporting found that audit failures are three times more likely in the first two years of an audit. Thus, there is a positive correlation between auditor tenure and auditor competence.”
So, what is the answer to audit firm rotation? There is real value in asking your audit firm to switch up CPAs occasionally. You won’t the lose the valuable consistency but will get a fresh set of eyes on your records and processes. But most importantly do your homework when selecting a firm in the first place expecting it to be a long-term relationship. Do they specialize in serving the non-profit community? How are they staying a breast in developments in the non-profit sector? What are other non-profits saying about their experience with the firm? Remember you are looking for a team member not just a service provider.
If you would like more information or assistance in selecting an audit firm give us a call – 608-364-0155 .